To buy or sell large quantities of assets without tipping off other participants in a market, large investors often make use of “iceberg orders”.
When it comes to understanding this order type, however, what most people know is just the tip of the iceberg – excuse the pun!
In this article, we will break down everything you need to know about iceberg orders in crypto.
In an iceberg order, the total amount of a buy or sell order is hidden from plain sight until after it has been fully executed.
Iceberg orders work by breaking down a large buy order into smaller orders, making it difficult to observe how much of an asset is being bought or sold at once.
When an iceberg order takes place, market participants are left in the dark about the total amount of the asset that is being traded. Instead, all that most people would be able to readily observe in the order book is smaller transactions which are actually just the ‘tip of the iceberg’.
The purpose of iceberg orders is to hide the amount of an asset that is being bought or sold within an ecosystem until after the full transaction has taken place.
Large institutional investors, for instance, might use an iceberg order in order to hide a large buy order, instead revealing only a small amount of their total order.
Iceberg orders can allow institutional investors to execute a large buy or sell order without tipping off the market. When buying assets, for instance, investors may not want to create market speculation that could drive up an asset’s price. When selling an asset, on the other hand, investors may want to cash out their holdings without creating fear in the market that could cause a price crash.
In other words, iceberg orders are used by investors to make trades seem less significant than they actually are.
In addition, iceberg orders can also be used to maintain a sense of anonymity in situations where the person behind a large purchase or sale does not want to be readily identified.
While iceberg orders have long existed in the world of traditional finance, iceberg orders now commonly take place in the crypto space as well. This is especially true when large investors are dealing with assets that have volatile or illiquid markets.
For example, an institutional investor who wants to buy $100,000 worth of a digital asset may not want to tip off the market about the total amount that they are buying in a single large order. Here, an iceberg order could work to only reveal a small portion of the amount of tokens they are purchasing until after their trade is complete.
In this scenario, there are a couple of key reasons that the institutional investor may not want to tip off the market when making their large purchase:
Iceberg orders and hidden orders are differentiated by their purpose. Whereas an iceberg order attempts to only initially reveal only a small portion of their overall trade, hidden orders attempt to hide purchases or sales from order books entirely.
Hidden orders are also known as dark pool orders or hidden liquidity. By design, they cannot be observed in the public order book. Often, this is done with the intention of buying or selling an asset without having any impact on a market.
In contrast, iceberg orders only work to mitigate market reaction until after the order is executed.
Further, while iceberg orders do also attempt to obfuscate an investor’s intentions, they are not hidden altogether. With an iceberg order, the total amount of an asset that has been bought or sold is revealed over time as the order is executed.
Iceberg orders are designed to be difficult to detect until after an order has been executed. As a result, it can be hard to find clear indicators that an iceberg order is actually taking place.
While it is often next to impossible to identify an iceberg order with complete certainty, there are some clues that can signal that an iceberg order is occuring.
One clue can be found when observing a range of small orders in an order book. When a consistent clutter of buy or sell orders is identified, it can signify that a larger order has been broken down in order to pass without detection.
Another way that an iceberg order could potentially be identified is through the existence of small but frequent volume spikes. These small spikes could be taking place as a result of the smaller chunks of an iceberg order being executed.
In the world today, most iceberg orders are placed using trading platforms and exchanges that explicitly provide this functionality.
On these exchanges, placing an iceberg order can be as simple as selecting “iceberg order” as an order type.
Behind the scenes, the exchange or platform handles the execution of an iceberg order on behalf of the user through an automated algorithm.
When referring to an iceberg order algorithm, we are talking about the way in which an exchange or platform turns a single large buy or sell order into a range of small orders.
The algorithm that these platforms use is designed to automatically break down a large buy or sell order in a way that cannot readily be detected by other market participants. They work by calculating the order sizes necessary to ensure that only a small portion of the order can be seen until after it has been executed.
Iceberg orders are not seen as market manipulation, as they are viewed as a legitimate tool for managing trades. In particular, iceberg orders are valued as a way to maintain anonymity.
However, due to the fact that iceberg orders obfuscate information from other market participants, they can be used in conjunction with market manipulation tactics. For this reason, most exchanges have put in place rules around how iceberg orders can be executed by their users.
While iceberg orders on their own are neither illegal nor considered market manipulation, it is worth considering that they are typically used by large institutional investors. Everyday crypto holders, on the other hand, may find that this represents an unfair playing field between institutional investors and everyone else.
Regardless of where you land on the topic of iceberg orders, the fact remains that this order type readily exists in the world today. As a result, knowing what they are and how to identify them is the best way to navigate the landscape.
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Disclaimer:Please note that nothing on this website constitutes financial advice. Whilst every effort has been made to ensure that the information provided on this website is accurate, individuals must not rely on this information to make a financial or investment decision. Before making any decision, we strongly recommend you consult a qualified professional who should take into account your specific investment objectives, financial situation and individual needs.
Connor is a US-based digital marketer and writer. He has a diverse military and academic background, but developed a passion over the years for blockchain and DeFi because of their potential to provide censorship resistance and financial freedom. Connor is dedicated to educating and inspiring others in the space, and is an active member and investor in the Ethereum, Hex, and PulseChain communities.
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